European markets drop after Nikkei slump

In London, the FTSE 100 index was down 3.21% and had fallen below the 4,000 level in early afternoon trading. In Paris, the Cac 40 index was off 3.94%. In Frankfurt, the Dax had dropped 2.68%.

The lower trading in European shares came as:

• Switzerland became the latest European government to roll out a plan to rescue its banks. UBS, the biggest bank in a country known for its banking stability, will take $5.3 billion from the government and lay off $60 billion in bad assets to the country's central bank.

• Leaders of the 27-member European Union prepared to call for a coordinated supervision of the bloc's financial system and a crisis unit to help manage financial turmoil, Reuters reported. The leaders, meeting in Brussels, also said an international summit later this year should take quick steps on standards of regulation and transparency in the world banking and investing.

Earlier in the week, European shares rose on optimism that bank rescue plans by Britain, Germany, France and the United States would stave off a global financial meltdown. But they haven't staved off worries that the globe is slipping into recession.

U.S. stock futures, however, were pointing higher after Wednesday's big drop.

The latest bout of selling in the markets was stoked by a record percentage fall on Wall Street Wednesday after weaker-than-expected U.S. retail sales data and a downbeat assessment from the U.S. Federal Reserve indicated that the world's largest economy is already, or about to fall, into recession.

"Once again a market rally is brought to a juddering halt by dramatic falls across global markets," said Matt Buckland, a dealer at CMC Markets.

"The persistent fear of a global recession shrugged off the cheer about banking rescue plans in the previous session with the Dow down 7.9% and the S&P500 off 9%, their worst one-day percentage falls since 1987, as U.S. retail sales were weaker than expected and the Fed's Beige Book showed weakening economic activity across the country," he added.

On Tuesday, the U.S. government followed Europe's lead and announced it is to pump some US250 billion into shares of its leading banks as part of the $700 billion package passed by Congress earlier this month.

The U.S. plan was criticized overnight for being insufficient by Japanese Prime Minister Taro Aso. He blamed the renewed drop in markets on an "insufficient" U.S. bailout plan totaling $700 billion. "Since it was insufficient, the market is again falling sharply," Aso told lawmakers.

The long-term key is whether the flurry of activity by governments can actually break the logjam in credit markets. Despite the coordinated interest rate reductions announced last week, and massive liquidity boosts, the rates at which banks lend remain abnormally high, despite some easing in rates and spreads this week. That could in turn make it harder for businesses and consumers to get the credit they need and hurt the economy.

The Hong Kong interbank offered rate, known as Hibor, for three-month loans actually ticked up slightly overnight to 4.35% after easing the past couple of days.

Though the rescue packages have helped alleviate the pressures on the banking system, they will do nothing to prevent a serious economic slowdown. Fed Chairman Ben Bernanke warned in a speech Wednesday that patching up the credit markets won't provide an instantaneous jolt to the economy.

"Everyone is very worried about the economy in the U.S and around the world," said Jacky Choi, a Hong Kong-based fund manager at Value Partners Ltd., which manages about $5 billion in Asia.

Concerns about the global economic outlook are clear also in the price of oil, which has fallen another $1.88 to $72.66, a new 13-month low.

Commodity stocks are also in retreat after Rio Tinto PLC, one of the world's biggest mining giants, warned of slowing raw material demand from China, the world's biggest growth engine over the last few years. "The Chinese economy is pausing for breath after spectacular GDP growth," the company's chief executive Tom Albanese said.

Meanwhile, insurance policies against companies failing to make good on their debt, known as credit default swaps, were more expensive — a signal that firms believe the risk of default is growing.

The U.S. dollar edged up to 100.43 yen, while the euro rose to $1.3473.